The Transformer – February 25, 2008

Points and counterpoints

on decoupling Transformer

Background

Our Nov. 28 Transformer on decoupling, a strategy for overcoming potential revenue losses for utilities that invest in energy efficiency, elicited a flurry of electronic responses. Several writers were complimentary; others sought clarifications of insider terminology (we’ll keep working on that!) or additional information, which we supplied them individually.

Two correspondents challenged at least some of the article’s conclusions, however. One was former NW Energy Coalition staff member Dick Fiddler, who spent many years working on conservation for Seattle City Light. The other was David Aldrich, a commissioner for the Snohomish Public Utility District, one of Washington’s largest utilities and a regional leader in energy efficiency investments.

We appreciate these highly respected utility professionals taking the time to read, analyze and comment upon our decoupling article. This issue of The Transformer considers and offers responses to their major points.

To recap

Let’s quickly summarize the article: Decoupling is an automatic mechanism, favored by many clean-energy advocates, that periodically adjusts utility rates to reflect changes in customer use. When overall customer usage increases, the rate drops a bit to keep the utility from over-earning on fixed costs. When collective usage goes down — due, for example, to conservation programs — the rate increases slightly to keep the utility whole.

The idea is that utilities shouldn’t be punished for helping their customers use less energy. Advocates believe decoupling makes the utility indifferent to changes in use, and thus more willing to fund aggressive conservation programs or support tighter appliance standards and building codes.

Fiddler’s tune

Dick Fiddler agrees in principle. But decoupling, he says, isn’t enough to make utilities fully embrace conservation. With or without decoupling, efficiency programs cost money, and because customers pay lower utility bills thanks to conservation, rates have to rise. “Utility managers hate raising rates for something vague like the public interest or saving the planet,” he writes.

Fiddler also feels that many utilities are “prejudiced” against conservation, which they see as kind of squishy and impractical, and would rather build power plants. “There’s lots of polite lip service covering up a deep-seated attitude problem,” he writes. Thus “I’d put decoupling way down the list of things we seek to accomplish.”

To which we say …

Recent history demonstrates a willingness on utilities’ part to make firm commitments to energy efficiency as a condition of getting decoupling. That’s been true in every rate proceeding we’ve entered. Properly designed decoupling is one way to assuage utilities’ reasonable fear of losing revenue when their customers save energy. And it’s worked. When we’ve agreed to decoupling, they’ve committed to more efficiency investments and greater energy-savings targets.

Splitting the baby

David Aldrich provides a contrary critique. He strongly agrees that some rate mechanism must be used to address a utility’s loss of money from reduced sales. However his solution is to split customer bills into two pieces: a large fixed, or customer, charge (about $30 a month) to cover the utility’s fixed costs (costs that don’t change with use, such as meter reading and the costs of poles and wires), and a separate charge for kilowatt-hours used.

The original Transformer termed that alternative “particularly poor.” It might solve the utility’s lost revenue problem (as does decoupling), but its unintended side effect could be reducing the customer’s incentive to conserve. As fixed costs make up a larger share of the bill and energy use a smaller percentage, energy efficiency improvements save customers less money.

Aldrich notes that because electric bills are a small part of the typical customer’s budget, the value of price signals in spurring conservation efforts is overrated.

And we say …

It’s hard to place a firm value on price signal, but why not provide it if it doesn’t compromise other important principles, including ensuring that the utility collects enough money to cover its fixed investments? The advantage of decoupling is that it removes the utility’s disincentive and continues to give consumers a strong financial incentive to conserve.

Keep those cards and letters comin’ in

The preceding comments are hardly the final words on a fairly complex subject. We hope they further the ongoing dialogue and we invite – no, encourage – additional comments, critiques and observations.